Gainers and losers

Bharti Airtel and Vodafone seem to be clear beneficiaries of the Supreme Court's decision to cancel 122 2G telecom licences issued in January 2008. This may result in the return of pricing power to the leading operators and ample spectrum availability, as a result. Around 8 per cent of the 894 million mobile phone subscribers have taken connections from the new players (with 2008 licences) such as Uninor, Videocon, Loop, STel, Sistema Shyam (MTS) and Etisalat DB as of December 2011. Many of these are pan-India players (21-22 service areas), while others have regional footprint.

It was widely speculated that many of these new operators would merge with large incumbent players and exit the telecom space with some profits. Now, the whole mergers and acquisitions scenario has been altered with cancelled licences likely to force the exit of new players.

PRICING POWER

Incumbent players may gain in three ways from this wholesale cancellation of new licences.

One, the number of operators in most circles stands to be reduced from 13-15 to about 6-8 after this order. Bharti Airtel, Vodafone, Idea Cellular (in its unaffected 13 service areas) and Reliance Communications (with respect to its GSM operations) could see a return of pricing power. Freed of competitive pressure, they may get the flexibility to raise tariffs.

Two, their hands will be strengthened by the fact that most new operators have just 25-59 per cent active subscribers (those that recharge and use services regularly). Users having multiple SIM cards for different purposes may now have to discontinue usage and move to the top 3-4 operators in their circle. This can boost revenues (average revenues per user) for them.

Third, even with competition operators such as Bharti, Vodafone, Idea and strong regional players such as Aircel have increased mobile call rates in some circles . Now, they will have more leeway to do so.

NEW OPERATORS STRUGGLE

With 122 licences cancelled a huge chunk of spectrum now is free. There are indications that operators may have an option of bidding in a auction of 2G spectrum .

But if the 3G spectrum is any benchmark, a pan-India licence would cost 10 times more than Rs 1,651 crore that operators paid for a pan-India licence back in January 2008. The TRAI has, in fact, indicated an even higher price for 2G spectrum that is 1.3-1.5 times the cost for 3G airwaves. It is unlikely that any new operator would have the wherewithal to pay this amount and invest continuously to upgrade network .

LISTED PLAYERS MILDLY IMPACTED

But having said this, there are a couple of caveats. While the move will aid pricing power for Reliance Communications, it could result in a setback to its tower business.

The company has a tower sharing arrangement with Etisalat DB, a Rs 10,000 crore deal over 10 years, which stands to lose tenancy and rentals. For Idea Cellular, whose nine licences have been cancelled (while 13 remain), there are uncertainties. First, these licences were applied for in 2006 itself and not bunched up with the bids made in 2007-08. Therefore, the question is if they will receive a different treatment. But Idea derives only about 4 per cent of its overall revenues from the circles under threat.

Among these only Chennai and Kolkata are key metros, where the company can opt to participate in the fresh auction. Karnataka and Punjab are service areas where Idea already has operations through acquisition of Spice Communications. There is, of course, litigation on overlapping licences, but Idea's operations will continue unhindered.

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